Fear Not? The Economic Impact of Vietnam’s Political Churn

Over the past two decades, Vietnam’s development can be described as a binary dance: two steps forward, one step backward. When a president and two deputy prime ministers lost their jobs at the same time in January 2023, but 2022 economic growth still hit 8 percent, many foreign investors believed it was just a political hiccup – a step backward, but the country was still moving forward.

Yet when four other Politburo members were forced to resign in the first half of 2024, and a $12 billion banking fraud case was revealed, international observers couldn’t help but question: When will this backward step end? Is Vietnam still moving forward when its neighboring countries are jumping ahead relatively faster?

No country, besides India, has benefited more from the post-pandemic race to de-risk from China than Vietnam. Foreign investment is entering the country at record levels. In 2022 a record was set with $22 billion in pledged investment. $36 billion was pledged in 2023, and in the first six months of 2024 already over $15 billion was pledged, a 13 percent year-on-year increase from 2023.

What is more impressive is that nearly $8 billion went into over 1,200 new projects, a 27.5 percent year-on-year increase. Government statistics suggest that some $10.8 billion in foreign investment was disbursed in the first half of 2024.

Foreign investment is critically important to Vietnam’s growth. In all, the country has over 40,000 projects worth over $481 billion. More importantly, foreign investment accounts for some 70 percent of its total exports. Indeed, Samsung alone accounts for nearly 20 percent of total export value. In the first half of 2024, exports of mobile phones, computers, and other electronic components reached a record high of $60 billion, according to government data. The financial company Nomura predicts Vietnamese exports will more than double from $353 billion in 2023 to $751 billion in 2030.

The topline numbers are very attractive, but they are not inevitable. Semiconductor manufacturers Intel and AT&S recently chose not to expand their operations, and LG Chem walked away. Ørsted, one of the world’s largest offshore wind producers, quit the country in mid-2023, obliquely citing corruption.

Given all that, it’s important to look deeply at the ongoing anti-corruption campaign. Vietnam bills itself as a more open and less authoritarian model than China. But like China, one of its key selling points to the international business community is political stability.

Vietnam has been anything but stable in the past 20 months.

Since December 2022, seven of the 18 members (39 percent) of the elite Communist Party of Vietnam (CPV) Politburo have been forced to resign. While some of those figures are party apparatchiks, whose departure would not be missed, several were well-known technocrats and interlocutors with the business community, including Deputy Prime Minister Pham Binh Minh and President Nguyen Xuan Phuc. Another president and the head of the National Assembly, which is in charge of drafting laws and implementing legislation, were also forced out.

In July 2024, General Secretary Nguyen Phu Trong passed away, leading to concern about an intensification of political infighting.

What does this unprecedented churn in the senior leadership mean for Vietnam and its economic prospects? And what should we expect in the coming a year and a half ahead of the quinquennial 14th National Party Congress in early 2026?

The “Blazing Furnace” Anti-Corruption Campaign

Vietnam clearly has a corruption problem. Despite some efforts to combat it, corruption is growing for five reasons.

Structurally, the state still controls too much of the economy, including all the land, access to capital, and other inputs.

Soft property rights incentivize rent-seeking behavior.

Government officials – who are in charge of resource allocation, permitting, and regulation – have an incentive to be corrupt, given their paltry salaries, rising inflation, and the limited capacity of the state to investigate and prosecute corruption. Recent high-profile corporate fraud cases, including Saigon Commercial Bank, were only made possible by corrupt regulators.

The Vietnamese economy has clearly outpaced the state’s regulatory and enforcement capacity, and with so much hot money flowing into the country, everyone wants their cut.

Finally, without a free press and with government efforts to regulate and encourage self-censorship on social media, officials are largely unaccountable.

At the top level, Trong, who passed away on July 19, deemed corruption to be an existential threat to the party, and made anti-corruption the leitmotif of his 13-year tenure. In 2013, he shifted the anti-corruption committee from state to party auspices, putting himself in control. But the “killing the chicken to scare the monkey” approach has failed.

Efforts to stamp out corruption at the senior-most levels of the party have made a mockery of the anti-corruption campaign. None of the seven Politburo members forced to resign was prosecuted. Indeed, they have all been given soft landings with their status, perks, and wealth protected. Each has businesses tied to them through family or cronies and, by any measure, they are wealthy people. Only one former Politburo member, Dinh La Thang, has gone to jail for corruption since 2020.

None of the 20 other Central Committee members (out of 180 full members and 20 alternates) to have been forced out of this term’s elite decision-making body has been prosecuted, either.

The “blazing furnace” anti-corruption campaign has shown that it’s not just one or two bad apples at the top who are corrupt, it’s all of them. In the eyes of the public, this has delegitimized the CPV.

In the first five months of 2024 authorities initiated legal proceedings in 2,100 economic crimes cases, involving 4,211 defendants nationwide. Yet no one can point to an improvement.

When we dig down, five of the seven Politburo members who were sacked had one thing in common: They were eligible under existing party rules to become the next CPV secretary general at the 14th Congress, expected to be held in January 2026. So the churn is really down to the unprecedented political ambition of one man, To Lam.

Lam had been the minister of public security since 2016. In that role, he did what one would expect of the security minister in a one-party communist state: He ensured the party’s monopoly of power.

In 2021, after being filmed eating $1,000 gold leaf-encrusted steaks at a high-end restaurant in London, hours after laying a wreath at the grave of Karl Marx, his career seemed to be over. But Lam put himself and his ministry, with its vast investigative powers, at the disposal of the party chief to root out corruption. Lam understood that the best defense was a good offense and weaponized the Ministry of Public Security to target political rivals.

Lam was elected president in May 2024 following the resignations of the previous two incumbents, who appear to have been forced out by him. While he tried to concurrently hold on to the Ministry of Public Security, concerns were raised both within the Central Committee and Vietnam’s surprisingly plucky and independent National Assembly that he was accumulating too much power in a system that prides itself on collective leadership.

The Death of Nguyen Phu Trong and Its Implications

The death of CPV General Secretary Nguyen Phu Trong capped a tumultuous 20 months for Vietnam. But in many ways, it may return the country to political stability and auger more pragmatic economic decision-making. There are six key takeaways, especially for the business community.

First, we should see a return to political stability, at least in the short run. To Lam, who led Trong’s funeral delegation, appears firmly in control until at least the Party Congress in 2026.

Shortly before Trong’s death on July 19, the Politburo and Central Committee announced that Lam would assume the responsibilities of the general secretary due to Trong’s poor health. The statement said that Lam would oversee the party structure, bypassing Luong Cuong, who as the head of the secretariat is supposed to serve when the general secretary is unable to perform his duties.

The Central Committee’s 10th Plenum is scheduled for October, when a formal acting general secretary could be selected. There are some suggestions that the party leadership has already determined that To Lam will be elected general secretary at the 14th Congress, so for the sake of political stability and continuity, he should immediately begin to serve in an acting capacity. If the forced resignations in the past 20 months were meant to clear the path for Lam, then they served their goal.

Of course, that outcome is not a certainty. Under existing party rules, though they could be changed, there are currently only two people eligible to become the next general secretary at the 14th Party Congress: Lam and Prime Minister Pham Minh Chinh.

Chinh has been saddled with multiple corruption scandals of his own, including longstanding ties to one local company, AIC Group, that just can’t stay out of legal jeopardy, and whose chairwoman, already sentenced in absentia, is believed to be living in Germany. The third trial involving AIC commenced in early July 2024.

While some quarters see Chinh as a preferable alternative to the former security chief, Lam appears to be holding him in check. And Lam still has the tools at his disposal to target rivals.

While there were some attempts to clip Lam’s wings and nominate a successor to head the Ministry of Public Security from a rival faction within the ministry, Lam succeeded in elevating his protege, Luong Tam Quang, to succeed him. Quang has not just been Lam’s long-time deputy; they hail from the same northern province, Hung Yen, and during the U.S. war in Vietnam, Quang’s father had served as the bodyguard to Lam’s father, a high-ranking cadre in the south. As such, Lam is still able to continue to wield the Ministry of Public Security against any political rivals.

There is a lot of politicking going on behind the scenes. The official planning for the 14th Congress, in particular the drafting of the political report and other major policy documents, and personnel selection, is already underway. 

The CPV’s Central Committee has much more power than their Chinese counterparts. They have rejected party personnel selections in the past, and called for a clean slate. Vietnam prides itself on its collective leadership and there is far more resiliency than in a personalistic dictatorship.

None of this means that the anti-corruption campaign is over. It clearly is not. Two of the three deputy prime ministers are currently under investigation; another Politburo member is under a cloud for being seen wearing a Patek Philippe watch, while two others are seen as being against Lam. Yet, further resignations and dismissals are likely to be less headline grabbing.

Second, despite the anticipated relative political stability, there is still a lot of concern about policy stasis for several reasons beyond Vietnam’s already notoriously slow policymaking and implementation cycle.

There is usually a careful equilibrium on the Politburo. It is designed to balance geographical, party vs. state, institutional, factional, and other interests – though never gender.

Currently, the Politburo is out of balance. After the recent round of forced resignations, the Politburo briefly fell to a mere 12 members. One has to go back to the secretive wartime period to find such a small Politburo.

In May 2024, the Central Committee convened its Ninth Plenum, where it elected four new members, bringing the number back to 16, before the forced resignation of the Hanoi party chief and death of Trong brought it back down to 14.

The backgrounds of the four new members did little to inspire confidence in economic decision-making. All four represent the party bureaucracy, including mass mobilization and ideology. Only one, Le Minh Hung, has significant economic experience, having successfully served as the governor of the State Bank of Vietnam. But Hung’s current job is as the head of the Central Committee’s Organization Commission. Responsible for personnel for the CPV ahead of its 14th Congress, Hung is in a critically important job, but for now he has little direct influence on economic decision-making.

Two other Politburo members with significant economic experience, within the Ministry of Finance, the State Bank, and the Government Audit Office, were previously forced to resign.

In short, there is an appalling lack of economic expertise within the Politburo. For now, with a positive global environment and positive economic growth, there is little reason to be concerned. But should Vietnam face sudden economic headwinds, the leadership does not have sufficient experience. 

The other way that the Politburo is out of balance is that currently five of the 14 members came out of the Ministry of Public Security. Though the incumbent minister is not yet on the Politburo, he’s expected to be elevated soon, only increasing the Ministry of Public Security’s representation.

If one includes the three seats held by the People’s Army (one has retired), over half the Politburo is now held by people in the security sector.

That, coupled with Politburo Directive 24, issued in July 2023, reflects the regime’s growing concerns about “color revolutions” and the prospect of losing its monopoly of power. The CPV is definitely adopting more Chinese-style policy, language, and tactics in ensuring its grip over the country’s reins. While in China under Xi Jinping, the pendulum has swung wildly from growth to control, it is swinging in Vietnam, too, just within a narrower band.

Indeed, the arrest of two labor activists at a time when Vietnam was in the final phases of negotiating its Market Economy Status with the United States is telling. Hanoi desperately wants to be recognized as a market economy, but many in the U.S. Congress see this as the last point of leverage regarding Vietnam’s deteriorating human rights situation. (The United States’ final decision was due by August 2, just after this issue launched.)

A final factor in the apparent policy stasis is simply the institutional conservatism that is normal ahead of all party congresses. No big decisions are likely to be made between now and January 2026. The CPV’s focus will be on assembling the next Central Committee and Politburo. No one wants to make a decision that, by the time it gets implemented, goes against the interests and priorities of the new leadership. Vietnam is simply in a lame duck session.

While we expect little in the way of major public policymaking in the coming year and a half, there is plenty to do: implementing legislation, rules, and guidelines for existing legislation that really need to be codified. In many ways, these are more important to foreign investors and the business community than the actual laws themselves. For example, Vietnam has just released its long delayed power purchase agreement regulations for green energy.

But little else is getting done. The turmoil caused by the forced resignation of National Assembly Chairman Vuong Dinh Hue in April 2024 has not made the passage of legislation any easier.

A third key takeaway is that due to the anti-corruption campaign, local government infrastructure spending has all but ceased. On at least two occasions the prime minister’s office issued directives to local governments to spend what had already been allocated to them, and the prime minister has routinely exhorted local officials to proceed with approved projects. The leadership knows that the country’s infrastructure continues to lag behind its neighbors and that it remains a major irritant among investors. But local-level leaders are terrified of being caught up in a career-ending investigation.

Recent data out of Hanoi pointed to how bad the situation is. Only 21.2 percent of the 2024 funds allocated to the Hanoi City People’s Council for major infrastructure projects – including a fourth ring road, a pilot light rail system, and new waste water treatment plant – had been disbursed by June. And the capital is not the exception. In 2023, only 73.5 percent of allocated funds were spent.

There is some hope that this will sort itself out. While fear of being swept up in an anti-corruption campaign may deter spending, the desire for career advancement could overcome that as regional leaders need to show economic growth in order to get promoted at the Party Congress.

Fourth, some foreign investment will come into the country regardless of the recent political instability. It’s important to note just how much foreign investment coming into Vietnam is from China. As the Chinese economy slows, its corporations are seeking profits overseas, tapping into the faster-growing economies of Southeast Asia. Some Chinese firms, especially in the high-tech sector, are also investing in places like Vietnam to evade Western sanctions.

Vietnam has surpassed the United States as a destination for Chinese investment. In 2023 China and Hong Kong-registered investments reached over $8 billion, surpassing Singapore for the top spot. In the first three months of 2024 alone, there were 39 Chinese investments in Vietnam, second only to Mexico with 41.

But that, too, is not inevitable. Even Chinese corporations seeking sanctions relief have complained about the higher costs of business in Vietnam, and have started to look elsewhere. 

Fifth, there are some real opportunity costs for Vietnam if it can’t get its house in order, particularly amid competition from Malaysia and the Philippines. After six years of chaotic governance and a breakdown in the rule of law under Rodrigo Duterte, the Philippines has stable and competent leadership under President Ferdinand Marcos, Jr. The improved alliance with the United States has seen increased trade and investment as both countries trumpet “friend-shoring.”

Malaysia, which went through five prime ministers in four years, is once again attracting investment. 2023 saw $40 billion in pledged investment. And for the millions pledged to Vietnam’s semiconductor industry, Malaysia, which already has a large manufacturing ecosystem, is securing billions of dollars in AI and semiconductor investment.

In 2023, Malaysia received nearly $13 billion in investment in its semiconductor industry alone. The government has allocated $5.3 billion to train 60,000 chip designers and engineers over the next five years. It is playing at a different level than Vietnam, which for now still can’t ensure a stable supply of steady electricity and has only some 5,000 engineers in the semiconductor industry.

Vietnam is in a very competitive marketplace, and while it’s been a darling of investors in the past few years, capital is mobile and investors are not going to stick around if policymaking is brought to a standstill due to political infighting. While Vietnam has many things going for it, including its strategic location, and a highly educated and motivated workforce, it faces headwinds as well.

The country’s population is contracting and labor costs are rising. Electricity is inconsistent; infrastructure development is under its potential. The Mekong Delta is sinking, Vietnam has slipped in its commitment to achieve carbon neutrality, the global minimum tax is kicking in without government subsidies, and corruption is endemic. Most importantly, Vietnam still is highly dependent on the import of components, leaving real concerns that it will be caught in the middle income trap, unable to develop future manufacturing ecosystems. While foreign investment is coming in, some is also passing Vietnam by.

Finally, an important takeaway is that there remains incredible fragility in Vietnam’s capital markets, in part as a result of the anti-corruption campaign.

The arrest of Truong My Lan, the CEO of real estate giant Van Thinh Phat in October 2022, revealed a jaw-dropping $12 billion fraud. Her arrest, which resulted in a $24 billion government bailout of the affiliated Saigon Commercial Bank, put Vietnam’s indebted real estate market under intense scrutiny.

Bank loans and commercial paper dried up for developers, and without access to capital, defaults ensued. As in China, people were stuck paying mortgages for unfinished developments. By the end of May 2023, some 1,200 real estate development projects around the country, worth an estimated $34 billion, were suspended.

There are signs that Vietnam's real estate market is bottoming out and that the commercial bond market is reviving. But despite a surge in deposits, bank lending has slowed, despite government prodding.

While the State Bank of Vietnam was able to prevent a bank run at Saigon Commercial Bank, now under state control, the government doesn’t have the financial resources to respond to multiple or simultaneous bank runs.

Vietnam’s banking sector has improved a lot in the past decade, but the staggering degree of fraud at Saigon Commercial Bank – some $44 billion in total – was made possible by less than $10 million in bribes to the various regulators.

There was a 52 percent increase in bad debts at 28 banks in the third quarter of 2023. Non-performing loans are now at 6.9 percent of total lending. By comparison, bad debts accounted for 2 percent of lending at the close of 2022 and 4.6 percent in 2023. All of this begs the question: If Saigon Commercial Bank was able to get away with it for so long, why should we expect that other banks are not hiding their fraud and non-performing loans?

The trial of billionaire Trinh Van Quyet, the CEO of FLC Group, one of the country’s largest private companies, and 49 other defendants, which began on July 21, further reveals the scope of fraud within Vietnam’s capital markets that is enabled by the corruption of regulators.

So far, few heads have rolled within the leadership of the Ministry of Finance or the State Bank of Vietnam. And while the Ministry of Public Security performed very thorough investigations into Van Thinh Phat, Saigon Commercial Bank, and FLC, their resources are clearly stretched thin, while regulators have proven to be thoroughly corruptible.

Conclusion

While the topline numbers for Vietnam are very strong and it continues to attract significant amounts of foreign investment, neither condition is guaranteed to continue into the future.

Politics has taken its toll. Vietnam has missed its – albeit ambitious – growth targets for the past two years. The country’s economy is overly dependent on external markets and foreign investment. Its leadership has undergone significant churn, but more alarmingly, currently has a dearth of economic experience should the global economy suffer a reversal.

Trong’s passing is an opportunity for a much needed period of political stability. If To Lam has, indeed, consolidated power, we will see less political infighting between now and January 2026.

The leadership transition is also an opportunity for more pragmatic economic decision making. Trong was a lifelong communist ideologue. Like China’s Xi Jinping, he believed that economic growth could not come at the expense of party control. To Lam is an authoritarian, but he’s pragmatic and understands that party legitimacy – ergo regime security – comes from economic development.